Global Energy and Russia: Key Issues Cosponsored by the U.S.-Russia Business Council and Global Energy Initiative, Woodrow Wilson Center

May 29, 2009 : 8:30 a.m. ̶ 10:00 a.m.

Event Summary

At a recent Kennan Institute lecture on 29 May 2009, Yuri Shafranik, President, Soyuzneftegaz (Russian Union of Oil and Gas Producers), discussed Russia’s role in the development of world energy with respect to the function of hydrocarbons in the global energy balance and the current transformation of the oil and gas market. In assessing these issues, Shafranik concluded that with respect to energy supply and demand, the balance will shift and it will become increasingly true that "the customer is always right."

The Role of Hydrocarbons in the Global Energy Balance

According to the conventional understanding of the life of oilfields, core resources will soon be exhausted, putting the world on the verge of a severe oil shortage. Shafranik disputed this notion, arguing that "heavy oil" from bituminous shale and oil sands, gas hydrates, "matrix oil," and deep oil and gas deposits in the land and on marine shelves actually make hydrocarbon resources "practically inexhaustible." With the difficulties in developing these resources in mind, however, Shafranik did concede that the era of "cheap oil" truly has ended, and with it, the epoch of highly profitable oil business.

The Transformation of the Oil and Gas Markets

Shafranik observed that in general, the oil and gas industry is currently undergoing major transformations. Emphasis is shifting from crude oil extraction and refining to the development of services, new technologies and global energy companies are emerging, financial factors are beginning to dominate the oil and gas market, and this market is experiencing inflows of non-energy sector investors. Shafranik believes that all of these factors result in the world oil and gas market’s transition from a commodity market to a financial market. As the oil futures market becomes the core of the world energy market, Shafranik warned that the high volatility of the market poses a threat to global energy security.

In terms of price, the classic model holds, namely, that it is determined by the ratio of supply to demand. The main regulator of world oil prices in the last quarter of the 20th century was OPEC. "Now," Shafranik stated, "the oil market has become predominantly financial, and oil from a natural source has become a kind of financial asset." The constantly growing energy demand from new economies, the persistent and markedly accelerated inflation of the U.S. dollar in the 2000s, the weak regulation of forward and futures markets, and the activities of financial institutions, he explained, resulted in the integration of the oil futures market with the financial and currency markets. The interdependence of oil prices on the U.S. dollar exchange rate, U.S. Treasury bond yields, stock indexes, and gold and other commodities prices has caused the oil market to become a market of expectations, Shafranik argued. It has become global in the same way that financial markets are global, becoming exposed to a whole range of political and economic factors. "Therefore, while fundamental factors remain the basis for the speculative game and define a corridor for stable oil prices and the most common trends in the market, they have ceased to play an independent role in price determination and are significant only in terms of changes in investment expectations," said Shafranik.

Shafranik further identified other major trends at work in the development of the world’s oil and gas market, qualifying them as spatial, innovational, and institutional in nature. In terms of spatial transformation, he noted an enhancement of differentiation between energy producing and energy consuming regions and an increase in the number of countries and regions whose development cannot be ensured by their own energy resources. Such countries produced 87 percent of the worlds GDP in 1990 and 90 percent at the beginning of the 21st century. This led to a significant increase in international trade and development of energy transportation infrastructure. In terms of innovational transformation, Shafranik cited the change in the positions of various components of the oil and gas business and an increase in the commercial exchange of technology and knowledge. Innovative technologies, such as new generation nuclear power, Gas to Liquid (GTL) technology, the development of gas hydrates, renewable energy, and so on, enhance global energy security. Based on these trends, Shafranik predicted that such knowledge will become an autonomous sector of the global energy market. Finally, in terms of institutional transformation, Shafranik underscored the growing importance of global energy companies and the intensification of capital and property interpenetration between producing and consuming regions.

Russia’s Role in the Development of World Energy

According to Shafranik, the primary target of Russia’s energy policy is energy safety and efficiency provision. He cited the Energy Strategy of Russia, a document that outlines the priorities of Russia’s long-term energy policy and mechanisms for their implementation, such as pricing, tax, and customs policy, state legislation, and regulatory frameworks. He also sketched a picture of Russia’s oil and gas production, mentioning the development of the Eastern Gas Program, which by 2030 is projected to result in the production of more than 200 BCM of gas per year. He named Yamal and Shtokman as the main Russian natural gas export bases for the first half of the 21st century, noting that explorations of the Yamal peninsula project the existence of 11 trillion cubic meters of gas reserves. From 2009-2030, however, these projects will require an estimated $1.5 trillion of investment, acutely demonstrating Shafranik’s point that the increasing amounts of capital investment required for such projects are pushing the global energy market to transition from a commodity market to a financial market.